[A Sip of Books] Explaining the Economic Principles Embedded in Your 'Choices'

Some sentences encapsulate the entire content of a book, while others instantly resonate with the reader’s heart, creating a connection with the book. We introduce such meaningful sentences excerpted from books. - Editor’s note

Life is a series of choices. And those choices are inevitably linked to economics. Should you buy a car or use public transportation? Should you get a job, continue studying, spend, or save? Two authors, professors of economics and public policy at the University of Michigan, introduce how to apply economic tools to the choices we face, from personal and professional goals to public policy and broad economic policies. This book, praised by many professors and students, applies basic theories to modern examples in a familiar way.

To predict what others will do, put yourself in their shoes (empathy)

The core principle of economics studied in this chapter not only helps you make good decisions but also helps you understand and predict the decisions of others (your customers, competitors, employees, suppliers, and even friends and family). The secret to predicting how they will react is the "someone else’s shoes technique" (empathy). The idea of putting yourself in someone else’s shoes is to understand how others see the world.

Use the price elasticity of demand when devising pricing strategies.

When is a low-price policy effective? The answer lies in the price elasticity of demand. Southwest Airlines adopted a low-price strategy, selling tickets significantly cheaper than other competing airlines. They were able to attract additional customers with low-priced tickets, which was enough to compensate for the lower revenue per customer, making the low-price strategy successful. In other words, Southwest Airlines learned that low prices are a good choice when demand is very elastic. As a result, while other competing airlines struggled, Southwest Airlines grew at an incredible pace. However, if demand is inelastic, low prices not only reduce profit margins per customer but also fail to attract many additional customers. Therefore, a low-price policy reduces profits. If demand is inelastic, a high-price strategy is more appropriate.

The Blooming Onion is a softball-sized onion cut similarly to a flower, pounded, fried, and served with a dipping sauce. It weighs 1,950 calories and tastes very good. This dish is a signature item of Outback Steakhouse, an Australian-style American restaurant chain with hundreds of locations across the United States.

It is also a microcosm of the U.S. economy. The price of the Blooming Onion rose from $4.95 in 1993 to $6.99 in 2008 and $9.49 in 2019. Most other goods followed a similar trajectory, reflecting macroeconomic trends in inflation. Just as the price of the Blooming Onion fluctuated, the broader inflation rate also rose and fell with economic cycles.

For those in the restaurant industry, rising raw material prices are a significant issue. But it’s not just that. Across the economy, inflation expectations play a central role in price setting. This is a key reason why the prices of the Blooming Onion and many other goods have risen.

Principles of Economics by Stevenson | Betsey Stevenson & Justin Wolfers | Translated by Kim Taegi et al. | Sigma Press | 1024 pages | 43,000 KRW

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